The discovery by some congressmen that innovative companies have avoided paying legally avoided paying U.S. federal income tax on billions of dollars of net income has many in the media outraged and questioning the ethics of their actions. According to Chuck Bentley, “The case of Apple’s excessive success at legal tax avoidance should lead our legislators to examine the real unethical practices with our current system – sacred political cows allowed to opt out of taxes and political constituencies given a free pass. An estimated one-half of all Americans pay no federal income tax while the top five per cent of wage earners pay nearly 50% of the revenues collected by the federal government. Chuck Bentley is CEO of Crown, a nonprofit business and personal finance policy and educational organization.
“Punishing the most efficient stewards of resources to garner more for the most inefficient users who often redistribute it for political favors and special interests is not good public policy. Partisan use and abuse of the IRS and the tax code is also an ethical issue. Placing a contrived burden on political rivals and protecting political allies and their cash does not build confidence in the current system. This should be another focus of outrage.”
A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, much as, say, Toyota pays tax to the IRS on its US-source income. Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.